The Housing Boom and Bust

Thomas Sowell

4/29/2009 12:01:00 AM - Thomas Sowell

In the spirit of bipartisanship, my newest book-- "The Housing Boom and Bust"-- shows how both Democrats and Republicans ruined both the housing markets and the financial markets.

Like so many disasters, the current economic crisis grew out of policies based on good intentions and mushy thinking.

For far too long, too many people have regarded home ownership as "a good thing." It is certainly true that home ownership has its benefits. But, like everything else, it also has its costs and its risks.

Weighing such trade-offs is something that each individual and each family can do for themselves. It is when such decisions are made by politicians-- of whatever party-- that trade-offs tend to vanish into thin air, replaced by pursuit of a "good thing."

Beginning in the 1990s, getting a higher proportion of the American population to become homeowners became the political holy grail of government housing policies. Increasing home ownership among minorities and other people of low or moderate incomes was also part of this political crusade.

Because banks are regulated by various agencies of the federal government, it was easy to pressure them to lend to people that they would not otherwise lend to-- namely, people with lower incomes, poorer credit ratings and little or no money for a conventional down payment of 20 percent of the price of a house.

Such people were referred to politically as "the underserved population"-- as if politicians know who should and who shouldn't get mortgages better than people who have spent their careers making mortgage-lending decisions.

But, in politics, power trumps knowledge. Banks whose mortgage loan approval rates for "the underserved population" did not match the prevailing preconceptions found that they could not get government regulatory agencies to approve their business decisions on opening new branches or enlarging their financial operations, the way competing banks did when those competing banks met the lending quotas set by the government.

If meeting those quotas required lowering the standards for granting mortgage loans, that was often considered a lesser evil than having government regulators stalling or vetoing the business decisions necessary for competing in the financial markets.

While Democrats spearheaded this crusade, Republicans joined in as well. The George W. Bush administration, for example, urged Congress to pass the American Dream Downpayment Initiative, which subsidized the down payments of prospective home buyers whose incomes were below a certain level.

Who could be against "the American dream" of home ownership or so mean-spirited as to ask how much it would cost the taxpayers or what risks it would create for the whole financial system? Certainly not most Democrats or Republicans in Congress or the White House.

The media were also part of this crusade for more home ownership, more widely available. If some segments of the population did not own homes as much as others, that just showed that there was something wrong with the mortgage lending process, as far as editorial office philosophers were concerned.

As the St. Louis Post-Dispatch put it, "lending institutions are being far more conservative than they have to be in determining the creditworthiness of minorities."

Later, disastrous default rates and foreclosure rates among "the underserved population" who had been given mortgage loans to satisfy government quotas suggest that the old-fashioned mortgage qualifications that had been pooh-poohed in editorial offices had more basis than the crusades of politicians and the press.

There are many other complications covered in "The Housing Boom and Bust." But behind all the complexities was a very simple fact: Monthly mortgage payments by millions of home buyers were what provided the money for the banks, the financial institutions that bought mortgages from the banks, and the Wall Street firms that created sophisticated securities based on those mortgages.

Riskier mortgage lending practices, imposed by government, were what set the stage for many mortgage payments to stop and thus for the financial disasters that followed. Political rhetoric, echoed in the media, seeks to obscure that painfully plain fact.